Ways in which ‘fiscal cliff’ crisis could end

Reuters, WASHINGTON

Sun, Dec 23, 2012 - Page 13

So what now?

The US House of Representatives’ rejection of a bill to raise taxes on just 0.18 percent of US citizens — those making more than US$1 million a year — has raised questions about the Republican-led chamber’s ability to approve any plan to avert the looming “fiscal cliff.”

Unless US President Barack Obama and the US Congress can forge a deal during the Christmas and New Year’s holiday season, the largest economy in the world could be thrust back into a recession because of the steep tax increases and spending cuts that are due to begin next month.

The threat of across-the-board government spending cuts and tax increases — about US$600 billion worth — was intended to shock the Democratic-led White House and Senate, and the Republican-led House, into moving past their many differences to approve a plan that would bring tax relief to most US citizens and curb runaway federal spending.

Where do Obama and Congress go from here? Here are some possible scenarios.

‧ Obama and Boehner go back into their secret negotiations.

Before Boehner started touting his failed “Plan B” to boost taxes on those who make more than US$1 million, he and Obama were moving closer together on a plan to raise taxes on certain high-income Americans and cut spending. They could pick up where they left off and cut a deal to bridge the gap.

However, a compromise with possibly US$1 trillion in new taxes and US$1 trillion in new, long-term spending cuts could be a tough sell for both Republicans and Democrats in Congress.

‧ A huge drop in the stock market sends a loud message to Washington politicians to stop arguing and cut a quick, but meaningful deal.

That is what happened in late September 2008, after Congress rejected a massive financial bailout package despite warnings by Federal Reserve Chairman Ben Bernanke and then-Treasury secretary Henry Paulson of an economic collapse if the bill failed.

The “fiscal cliff” may not be as dramatic a situation, but the tax increases and cuts in federal spending could deal a stiff blow to the economy.

‧ No deal happens in the dwindling days of this year and the US government jumps off the fiscal cliff — at least temporarily.

On Jan. 1, income taxes would go up on just about everyone.

Such a scenario would mean that no member of Congress technically would have to vote for a tax increase on anyone — taxes would have risen automatically — and the only votes would be to decrease tax rates for most Americans back to this year’s levels.

‧ No deal occurs for another six weeks or so.

If Congress does not raise the nation’s debt limit, by mid-February the US Treasury Department likely would exhaust its ability to borrow. That would put the nation at risk of defaulting on its debt.

‧ Boehner decides on a gutsy move: Call a House vote on a bill that would raise tax rates for families with net annual incomes above US$250,000, exactly what Obama has sought.

The plan could pass the House with strong Democratic support and some Republican votes. As soon as it passed, the House likely would leave town for the rest of the year without addressing other Obama priorities, such as increasing the government’s debt limit.

‧ A partial deal is struck at any point.

Congress could pass a plan that would put off most of the income tax increases that are due next month, or extend some other expiring tax breaks — namely one to prevent middle-class taxpayers from being subject to higher tax rates aimed at the wealthy under the alternative minimum tax.

‧ Stock markets do not tank and Washington politicians conclude that the “fiscal cliff” is not such a bad thing.

Under this scenario, Congress and the White House could continue sniping at each other throughout next year and 2014, as they try to revamp tax policy and impose long-term spending cuts.